Yesterday, President Obama called for a two-year freeze on salaries for most federal workers, excluding those in the military. This would entail canceling a 1.4% pay increase that most federal civilian workers are set to receive in FY 2011, and passing no increase as part of the FY 2012 budget.

The presidents proposal is a good idea. As I wrote back in February, government employees have seen wage and benefit increases over 40 percent faster than their private sector counterparts since the start of 2007. In the months since I wrote that report, private compensation has slightly outpaced government compensation, but not nearly enough to close the gap.

Depending on the trajectory of private sector compensation over the next two years, it is likely that a two-year pay freeze will get federal employee compensation close to back on trend. But federal workers only account for about 10 percent of the public sector civilian workforce. The real battle is going to be at the state and local level.

Next years round of state budget negotiations is likely to involve even more austerity than the previous two, and lots of governments are effectively choosing between pay cuts and staffing reductions. The latter option is generally worse, both from a customer service perspective and for its broader economic effects. But public employee unions often prefer staffing cuts, as they fall on workers they dont represent (people who never became public employees due to a hiring freeze) and on more junior workers with less power in the union.

If the federal government sets an example by imposing a wage freeze, state and local lawmakers may find it easier to follow suitwhich they should, in most cases.

Finally, I would note that the Presidents pay freeze proposal does not apply to military personnel, who account for about half the federal workforce. Steny Hoyer has proposed extending the presidents proposed pay freeze to military personnel not serving in Iraq or Afghanistan. He may mean this as a poison pill, but I would view it as a sensible addition to a civilian pay freeze.

Military compensation decisions should be driven by the need to hit the militarys recruitment goals, in both quantity and quality. In FY 2010, the federal government broke its usual practice of “civilian pay parity,” giving a substantially larger raise to military personnel than civilian workers, on the grounds that this was necessary to recruit effectively during two wars, even in a recession. A freeze for civilian but not military personnel in 2011 would mean another year of non-parity.

Giving a larger raise to military personnel in 2010 was a reasonable choice, especially given the difficulty that the military had meeting its recruitment targets in the middle of the decade. But as we continue a phased withdrawal from Afghanistan and Iraq, the increased desirability of enlistment in peacetime will take pressure off recruitment and end the justification for above-trend military pay. Eventually, we will need a period of below-trend military pay increases to make up for a previous period of above-trend increases.